Markets and Pricing

Revenue is just price times volume so getting the right price is critical to growing revenue. If a company sets its price too low, it will leave profit on the table. If a company sets its price to high, it will not reach optimum sales. The relationship of price to cost drives gross margin and a company with too low a gross margin is destined to fail. Pricing is a major source of profit improvement. Even companies that have optimized their manufacturing and distribution processes (Stasz, 2003, Financ Exec 44–48 July–Aug) often fail to properly execute a pricing strategy (Wood, 2006, Chem Week, p 5, Nov 15). Pricing is as much art as science. But, there are a number of approaches that have proven useful. No one approach is right in every case, and at every time. But, the more one knows about pricing, the more sophisticated pricing strategy can be. Pricing decisions are complicated by the fact that the optimum price for a product changes over its lifetime, with the level of competition, and with a product’s target market. This chapter discusses major approaches to pricing as well as the strengths and weaknesses of each. Those approaches include cost centered pricing, market centered pricing, engineered cost, price elasticity, product life cycle, opportunistic pricing, micro economic pricing and touches on the theory of brands.